Why It’s Important That Delta Cuts Capacity

For 1Q17, Delta Air Lines (DAL) expects a 0.5% capacity decline as compared to the first quarter of 2016. This move is in line with its forecast of a 0%-1% decline in capacity.

Delta already announced its plans to cut capacity on international routes because international unit revenue weakness was worse than on domestic routes.

However, the continuous capacity addition by other players has led to intensified competition on domestic routes. To add to this, Delta has to compete with low-cost carriers like Southwest Airlines (LUV), JetBlue Airways (JBLU), Spirit Airlines (SAVE), and Allegiant Travel (ALGT). To compete with these airlines, Delta introduced basic economy fares, the first legacy airline to do so. This move led to additional pressures on unit revenues.

Delta Air Lines initially estimated getting back to positive unit revenues growth by the end of 2016. Delta, in fact, still believes that it will be the first airline to reach positive unit trajectory.

Delta’s capacity cut has helped it improve its utilizations for the past two months, a trend that could continue. Delta’s capacity cuts along with capacity reductions from other players will help improve the industry’s revenue scenario.

Next, we’ll look at how this will affect Delta Air Lines’ profitability. Delta Air Lines forms 1.6% of the PowerShares BuyBack Achievers Portfolio (PKW).